Leveraging Green Incentives to Increase NOI Moderator: Ravi Malhotra, ICAST Panelists: Scott Hays, ICAST Aniko Chu, Churchill Stateside Group Rachel Davis, Petros PACE Finance

Contact Information 601 Cleveland Street, Suite 850 Clearwater, FL 33755 (P) 727-461-2200 | (F) 727-461-6047 info@CSGirst.com www.CSGfirst.com Experience & Integrity

Green Financing Programs Overview Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) want to make it easier, and more cost effective, for multifamily owners to go green All three lending programs designed to recognize green building measures Owners can get additional loan proceeds, and better pricing, to make energy- and water-efficiency improvements on their properties.

Green Financing Programs Overview 2009 - FHA took the first step when it began offering mortgage insurance premium (MIP) reductions on green multifamily loans 2012 - Fannie Mae implemented its own green financing program, which has significantly expanded ever since 2015 - Freddie Mac came out with its own, rival program 2016 - Each updated existing programs and/or introduced new programs that were significantly more attractive than previous iterations.

Why are these green financing programs so attractive? Higher underwritten NOI & Value – depending on the program, Lenders are able to underwrite up to 75% of anticipated utility cost savings resulting in additional proceeds for the borrower. Additional loan proceeds – the borrower can utilize proceeds for energy or water efficiency improvements

Why are these green financing programs so attractive? No spending caps – green lending programs are not subject to the annual FHFA lending cap, allowing agency seller/ servicers more capacity for more green loans Audits are paid for (Freddie and Fannie) – Freddie Mac will reimburse the borrower $3,500 for their required energy study and Fannie Mae will reimburse in full for their required energy / water efficiency study. Preferential pricing - Multifamily developments that have obtained one of the eight industry standard green building certifications (determined by the FHFA, which include LEED, Green Globes and Energy Star) are eligible to receive preferential pricing

Fannie Mae Green Initiative Green Rewards: Requires minimum projected reduction of 20% energy or 20% water consumption. Reimbursement for 100% of the cost of a High Performance Building (HPB) report (equivalent to ASHRAE Level 2 energy and water audit), subject to loan closing Better pricing on refinance, acquisition, supplemental, and 2nd supplemental loans. Up to 5% additional loan proceeds. Underwriting of 75% of owner’s and 25% of tenant’s projected energy and water cost savings. Disclosure of the loan as a "Green MBS" to the bond market. Green Certification Pricing Break: Better pricing on acquisition, refinance, or supplemental loans for properties that are ENERGY STAR certified.

Fannie Mae Green Initiative Green Preservation Plus Reimbursement for 100% of the cost of a High Performance Building (HPB) report (equivalent to ASHRAE Level 2 energy and water audit), subject to loan closing under Green Preservation Plus. Better pricing on refinance and acquisition loans Up to 85% LTV. 1.15 DSC. Up to 5% more loan proceeds. Disclosure of the loan as a “Green MBS” to the bond market.

Freddie Mac Multifamily Green Advantage Green Up - Property energy and water usage must be recorded in EPA Portfolio Manager before closing and annually until 2 years after project completion. $3,500 toward energy audit (Green Assessment). For properties with projected savings of 15% or more in energy and/or water consumption based on Green Assessment, Freddie Mac will underwrite up to 50% of projected energy savings. Better pricing. Up to 5% additional loan proceeds.

Freddie Mac Multifamily Green Advantage Green Up Plus - Property energy and water usage must be recorded before closing and annually until 2 years after project completion. $3,500 toward ASHRAE Level 2-compliant energy audit (Green Assessment Plus). For properties with projected savings of 15% or more in energy and/or water consumption based on Green Assessment Plus, Freddie Mac will underwrite up to 75% of projected energy savings. Better pricing. Up to 5% additional loan proceeds.

Freddie Mac Multifamily Green Advantage Green Certified Discounted loan pricing for properties that have affordable rental units and that are ENERGY STAR certified as a multifamily property. Green Rebate Up to $5,000 cash rebate at time of loan purchase on new property loans to borrowers on their first mortgages, for benchmarking their property in Portfolio Manager and submitting a valid ENERGY STAR score -- no minimum score required.

FHA Mortgage Insurance Premium Reduction As of April 2016, HUD offers mortgage insurance premium (MIP) rate reductions for FHA insured multifamily loans secured by buildings that attain Green certification. Annual MIP rates are reduced to 25 basis points from current rates, which are typically between 45 and 70 basis points, for multifamily FHA-insured loan types that meet two conditions: The building must be Green Certified, or the building owner must attest that s/he is seeking Green certification for the building. The owner must attest that the building has achieved or will pursue an Energy Score of 75 or better using EPA’s Portfolio Manager. The score must be verified by a qualified assessor in preparing the physical condition assessment report. MIP rate reductions are available for multifamily new construction, renovation, refinance, purchase, or seniors’ housing. Green offers flexible and affordable certification for either new construction or renovation and, consequently, is a great path for builders seeking to qualify for MIP reductions.

FHA Mortgage Insurance Premium Reduction Why are MIP rate cuts important for YOU? Reduced MIPs will provide savings in the development budget as well as in operating costs. Ongoing operational costs will be reduced in the long term allowing more cash flow to you. For example: $15 million refinance loan will save $112,500 in upfront and $30,000 in annual MIPs Tenants also benefit. The green units can be 20% more energy efficient systems, keeping utility cost down.

Mortgage Insurance Premium Reduction

ICAST Qualifications 14+ Years of practical experience: Staff with over 100 years of combined experience Certified Technical Assistance Provider to HUD, USDA, Enterprise Community Partners, TDA Inc., ICF… Green Property Needs Assessment (GPNA) provider in compliance with HUD, USDA, Fannie and Freddie requirements ASHRAE Level 1, 2 and 3 Energy Audit provider EPA-certified ENERGY STAR rating provider ENERGY STAR score maintained for 70 MF properties

Benefits of Going Green DECREASE Financing Options NOI Property Value Occupancy Rates Health & Safety Energy & Water Use Resident Turnover Carbon emissions O&M costs Mortgage Costs INCREASE

FHA MIP Reduction – New Construction Case Study: 222 unit market rate new construction Built to 2015 IBC standards Building model to determine usage SEDI score of 83 Itemized ECM’s allowed for cost effective prioritization and value engineering

FHA MIP Reduction - Existing Enter minimum 1 year utility data in EPM for ES “Score” Electric, Natural Gas, and Water Minimum 25% sample of tenant metered data If >75, pursue Energy Star “Certification” If <75, model energy savings for SEDI LED’s and low flow’s sufficient? Are more invasive measures required?

Energy Modeling Tenant vs. Common Area Lighting Fans Appliances Faucets Toilets Misc.

Energy Modeling HVAC Infiltration

Energy Modeling Insulation HVAC Windows Infiltration

Energy Modeling Insulation HVAC Windows Boiler DHW Infiltration

Energy Savings = Increased NOI 15-25% Savings 30-50% Savings HVAC MATH MODEL In this business as usual example…

Green Capital Stack Options Off-Balance-Sheet Financing EPC PACE PPA EaaS Green Lending Incentives FHA – MIP Reduction Fannie – Green Rewards Freddie – Green Advantage EQUITY LIHTC HOME FUNDS Bridging the Gap in Financing DEBT BONDS SOFT LOANS

Off-Balance-Sheet Financing Energy Savings: EPC - Energy Performance Contract For PHA, USDA, Market Rate PACE - Property Assessed Clean Energy For all MF in eligible counties Energy Production: PPA - Power Purchase Agreement Leveraging solar for reduced utility rates

Off-Balance-Sheet Financing Energy As A Services: 3rd Party Capital for Energy and Water Investments Repayment via Utility Bill Payments UA transfer to Utility Payments For Subsidized and Market Rate

Rental Assistance Demonstration (RAD) For tenant-paid utilities: 75% of Energy Cost Savings moved from Utility Allowance to Rent Increase E.g. If green upgrades save $40 in UA, then $30/month is rent increase For owner-paid utilities: Energy Cost Savings = Greater NOI = Access to additional capital E.g. If energy savings = $50,000/year, then NOI is greater by $50,000 If you do it wrong it can cost you!

Green Lending Incentives

Timeline: ECM’s Payback Time (Years) 2-4 5-8 20 10-12 HVAC <1 Solar

Timeline: ECMs in an EPC Time (Years) 15 HVAC Solar

Off-Balance-Sheet Financing

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Thank you! Ravi Malhotra Founder and President ravi@icastusa.org 720-261-1086 www.icastusa.org